Amazon.com will aggressively expand its used product offerings and will lower prices in its domestic book/music/video business in the second half of the year, the e-retailer's top two executives told analysts in a conference call to discuss the company's second-quarter results for the period ended June 30, 2001. Sales in the bmv group inched up 1.1%, to $389.7 million, in the quarter, while pro forma operating income shot up 290%, to $39 million, giving the division a pro forma operating margin of 10%.
Chairman Jeff Bezos said that with the double-digit operating margin, the company could afford to pass cost savings back to its customers. Bezos said that it has always been Amazon's intent "to be the low-cost provider." While neither Bezos nor chief financial officer Warren Jenson offered details about Amazon's pricing plans, Jenson said the lower prices were part of the company's efforts to redirect its attention to sales growth. In its bid to achieve at least pro forma profitability this year, Amazon has been trading top-line growth for bottom-line improvement for the last several quarters. As a result, net sales for the entire company increased 16%, to $667.6 million, but the net loss was nearly cut in half, to $168.6 million. The pro forma loss fell to $58 million from $116 million in the second quarter of 2000.
Jenson said the bmv division has developed "sustainable profitability" and is positioned for long-term strength. The division will provide the business model for Amazon's other operations, Jenson said. And one facet of that model is used products. Approximately 10% of all orders in the second quarter were for used items, with 11% of units sold in the bmv division being used books, CDs and videos. Bezos said he was "pleased with the start" of the used product initiative and added that "sellers love the platform." Bezos said he was not worried that Amazon's used business would hurt sales of new products (although the company said the slowing sales growth was due in part to sales of used products that are not recorded as sales; Amazon only takes a commission), and that he was not concerned about angering suppliers.
Jenson said he was "comfortable" with Amazon's current infrastructure. He said Amazon will look for "creative ways" to increase sales while holding down costs, and cited as an example using Ingram to fulfill book orders; Amazon shipped its first order through Ingram a couple of weeks ago.
Amazon is expecting total third quarter sales in the $625 million—$675 million range and is projecting fourth-quarter sales to increase between 10% and 20%. Its revised revenue estimates mean that Amazon will not hit previously announced goals for the year, but the company maintained that it was on track to have pro forma operating income for the entire company in the fourth quarter.
For the first six months of the year, bmv revenues increased 1.6%, to $799.3 million, while pro forma operating income jumped to $66.6 million from $7.6 million in last year's second quarter.
The company has also shored up its cash position under an agreement with AOL, which has agreed to buy $100 million of newly issued stock. As part of the deal, Amazon will provide certain services for AOL's shopping channels, although Barnesandnoble.com will remain AOL's exclusive online bookstore.
The agreement spurred speculation that Amazon and AOL may be looking to form a closer alliance. While the deal included a standstill agreement preventing AOL from acquiring more than 5% of Amazon, a provision in the agreement permits AOL to submit "an extraordinary transaction" to Amazon, provided that AOL keeps the proposal confidential.
